Pat McKeough recently replied to an Inner Circlemember looking for an opinion on Palo Alto Networks. The maker of computer security has seen its share price jump on high-profile cyberattacks. But those price gains limit the stock’s appeal, says Pat.
Q: Pat: I recently met someone who works for Palo Alto Networks. They had great things to say about the company. I would like your thoughts. Thanks.
A:PALO ALTO NETWORKS INC. (symbol PANW on New York; www.paloaltonetworks.com) designs and makes firewall security systems to protect computers and mobile devices from online attacks.
Instead of imposing blanket bans for entire networks, Palo Alto’s systems analyze traffic and let network administrators control user access to specific websites and applications. Over 34,000 businesses in 140 countries use the company’s products.
Palo Alto first sold shares to the public at $42.00 and began trading on New York on July 19, 2012.
Thanks to growing demand for cybersecurity products, the company’s revenue jumped 512.4%, from $255.1 million in 2012 to $1.4 billion in 2016 (fiscal years end July 31).
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Palo Alto operates in a highly competitive field, so it must continually improve its existing products and develop new ones. In fiscal 2016, it spent $284.2 million (or a high 20.6% of its revenue) on research. That’s up 53.0% from $185.8 million (or 20.0% of revenue) in 2015.
The company also fuels its growth, and adds to its technical expertise, with acquisitions of related companies. For example, in April 2014, it paid $177.6 million in cash and shares for Israel-based cybersecurity firm Cyvera Ltd. Unlike traditional security software, which typically reacts to problems after an attack, Cyvera’s Traps system creates obstacles that stop or slow down intruders before they can reach sensitive information.
In May 2015, Palo Alto purchased California-based CirroSecure Inc. for $15.3 million. That firm makes software to protect cloud-based data-sharing applications such as Google Drive and Dropbox.
The company’s strong balance sheet gives it plenty of room to keep making acquisitions and developing new products. As of July 31, 2016, it held cash and investments of $1.9 billion, or $21.42 a share. Its long-term debt is just $508.2 million.
Palo Alto uses its cash to buy back shares. It just authorized a new $500.0 million repurchase plan that expires on August 31, 2018.
Recent high-profile cyberattacks against Yahoo! and the U.S. Democratic National Committee should continue to spur demand for the company’s products and push its shares higher. However, the stock is expensive at 55.2 times the $2.79 a share Palo Alto will probably earn in fiscal 2017.
Inner Circle recommendation: Palo Alto Networks Inc. is okay to hold, but only for aggressive investors.
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